Who will win the race in the inflight wifi space?

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By Marisa Garcia|October 23, 2017

Inflight wifi is a desirable service to many passengers, and there are a host of suppliers vying to dominate the space.

We have seen bold revenue projections, with LSE foreseeing a market of $130 billion by 2035, with airlines earning as much as $30 billion from offering the service onboard. But are those figures reliable? And, whether or not they are, which companies are likely to get the lion's share of them?

We spoke with Dave Davis, former CEO of Global Eagle Entertainment, one of the competitors in this space, and now Managing Partner of InMotion Holdings, a firm dedicated to investment in the satellite business, who also consults on connectivity.

He gave us his views on what it will take to win the wifi race and what winning will mean for suppliers, airlines and, most importantly, passengers.

Davis believes in a future of ubiquitous inflight wifi, a belief supported by the rapid pace of growth the sector enjoys now.

“If you look at third party estimates it's 20-30% annual growth in network connected aircraft. There are about 6,500 connected aircraft in the world right now, but the majority of those are in North America: United, American, Delta and Southwest Airlines. A bit more than 75% of North American carriers have some form of inflight connectivity, but in rest of the world is only about 12%. So there are huge opportunities, largely outside of the US, for this market to continue to grow.”

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Davis believes that both airlines and their passengers now expect connectivity to become as common place on planes as the seats themselves, even if that means that seats will change, particularly losing their seat-back screens.

“More and more passengers and more and more carriers are going to have access to some form of inflight connectivity.
“Another trend taking hold in the US and internationally as well is a demand for more and more bandwidth, more speed, more capability. People want to do things on the airplane similar to what they do at home. Chief among them is streaming Netflix or similar video services.”

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Davis is not the only expert in the field who argues that the industry will need more bandwidth as video streaming becomes increasingly popular at home, but some survey results, at least so far, give mixed signals.

IATA’s 2016 Global Passenger Survey, conducted in partnership with PwC showed that about 16% of passengers consider the availability of inflight wifi as an important passenger experience factor; 11% said the same of inflight entertainment (IFE), most.

Only 2% of 6,920 passengers surveyed in 146 countries from all regions said the availability of inflight wifiwas a determining factor in their choice of airlines. Ticket price was the key driver for 37% of those surveyed.

Only 16% of short-haul and 14% of long-haul passengers listed surfing the internet as their favorite inflight activity; perhaps related to the 16% of short-haul and 11% of long-haul passengers who want to catch up with work inflight.

By comparison, 42% of short-haul and 77% of long-haul passengers said they enjoy watching movies and TV inflight. Of course, live TV also relies on high-capacity connectivity.

Enter the age of BYOD entertainment

Davis believes the real demand for streaming is difficult to pin down based on surveys alone, considering state of the market right now.

“I think it’s a chicken and the egg problem. People don't [stream entertainment on wifi] because the systems aren’t capable of supporting it. I think, where the bandwidth is available, people will use it.”

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Davis, like others who specialize in the field, bases this view on feedback he’s received from airlines.

“What airlines want to provide is more and more bandwidth so that their customers can stream video. Airlines are getting this impression from somewhere and I think they're getting it from their customers.”

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Some carriers may also see higher bandwidth capacity as an opportunity to be rid of seat-back entertainment, moving towards a BYOD (bring your own device) streaming entertainment model.

American Airlines, for example, has no seat-back screens on the new 737 MAX, which will fly longer flights. The airline offers ViaSat’s high-speed wifi instead, which also powers JetBlue’s Fly-Fi inflight connectivity. ViaSat has sufficient capacity for passengers to support video streaming.

American’s decision is an aeronautics necessity. The added weight of the IFE on the seats would negatively impact the range on the 737 MAX. But it’s also cost-cutting because IFE equipment is expensive. One might argue that BYOD benefits passengers because their electronic devices will continue to evolve at a more rapid pace than IFE can, given aircraft certification requirements.

“I think that seat-back IFE is expensive and heavy, so if there is a way to offer IFE without that hardware, I'm sure airlines are looking for it. In BYOD, they see a solution. There are some impediments to that. You can't get early window Hollywood movies on your handheld device, but I would say there are some subset of airlines that would rather have high-speed internet than bulky equipment of the plane.”

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We asked Davis whether he believes that as BYOD becomes more common passengers will feel cheated.

“There is a place for seat-back IFE, particularly in a first class cabin…my opinion is that those passengers are definitely going to care. If I’m incoach, shopping largely on price, and there is high-speed internet available, am I really going to switch my buying pattern because there's no seat-back IFE?
I don't think that's as big of a factor. For certain segments of passengers, like first class, seat back IFE will remain important, but the rest of the aircraft probably less so.”

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Of course, JetBlue has, at least for now, opted to offer all of the above, inflight streaming capacity wifi, and seat-back entertainment with live TV.

Who pays for wifi?

The other critical factor is that supplying greater bandwidth is expensive. Some airlines still charge for the service onboard, but that may change, Davis says.

“There are calls for carriers to offer more offer these products for free. In the US, JetBlue offers free connectivity. In Europe, Norwegian offers free in-flight connectivity, but that does make the take-rate very high and need for bandwidth high as well.
“It’s an expensive asset, but I think it’s more becoming an expense that airlines believe they need to bear because passengers are demanding it. I think it’s sustainable as long as airlines believe that they need to offer it.”

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As a result of real or projected demand, greater bandwidth is being made available to aviation’s in-flight connectivity applications. Davis says that the bandwidth dedicated to in-flight wifi doubled from 2016 to 2017, though the number of aircraft with equipped for connectivity only grew by about 28%.

Whether airlines pay for the service, or whether they rely on passengers to cover part of the costs, the suppliers have the greatest cost burdens to bear right now, in building up infrastructure and reaching a scale of installations which makes the business viable. For now, suppliers are taking great financial risks, Davis says.

“You see a number of providers making what are, in the short-term, irrational decisions. They are giving equipment away, and signing up to performance requirements that will be difficult to meet, and so forth. Basically, the providers in the space will be burning cash and losing money.
"Ultimately, that will lead to some sort of consolidation among the industry players. How that consolidation shapes up, who will end up as the final two or three players in the market, I think, is too early to tell. It's unclear at this point.”

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Consolidation will follow

Davis believes the risks of building infrastructure, the costs of waiting for scale, and the business dynamics of commercial aviation will lead to inevitable consolidation among existing suppliers.

“On the supplier side, there is a little bit of an unsettled situation. You have six or seven providers around the world vying for the available real estate, which is getting their equipment installed on aircraft.
“The ultimate winners in this are going to be companies with a large installed base of aircraft and the companies that have the balance sheet to fund growth. That funding of growth takes different forms. One of them is development of new antenna technology, also potentially investing in satellites. The other is the ability to fund the losses in certain regions.
"You're paying a bunch for bandwidth in parts of the world where you don’t have that many customers yet, but you need to have the network inflight, to service even one airplane. It's really [a combination of having the] install base, and the balance sheet to compete in the long run.”

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So who will win the race? Davis hesitates to predict in a market that is changing so quickly, but he mentions two competitors which have what it takes.

“I think you can have a satellite owner, like ViaSat, who can be, long term, very viable. They serve multiple verticals. They don't serve just aviation. They serve the terrestrial market, the maritime market, the US government market. So they are larger, more diversified suppliers. They can fund launches when markets are growing in certain segments and they can—very importantly—keep their satellites, their hardware and their networks highly utilized.
“You can look at Panasonic with well over 1000 aircraft connected, a large company behind them, seat back IFE business—that’s likely to be a long-term survivor.”
“There could potentially be more than three players, but I think there will be two or three players which will dominate.”